Steel Is Rallying With Chinese Builders Beating Mills

A worker walks on stacks of steel pipes at a storage yard in Shanghai. Growth in China's demand for steel may be crimped by government efforts to tighten lending and toughen approvals for new homes as it seeks to curb surging housing costs. Photographer: Tomohiro Ohsumi/Bloomberg

Sept. 5 (Bloomberg) -- The fastest Chinese steel output on
record is still too slow to meet demand from builders, reducing
inventories and driving prices toward a bull market.

Production of steel reinforcement bars rose 14 percent to
113 million metric tons in the first seven months and stockpiles
slumped 35 percent from an all-time high, data compiled by
Bloomberg show. Rebar, accounting for almost one-third of steel
output in China, will average 4,000 yuan ($655) a ton in the
fourth quarter, 7.1 percent more than now and the highest in
more than a year, according to the median of 15 analyst
estimates.

The appetite for steel suggests sustained demand for
commodities, even as Premier Li Keqiang tries to curb excess
lending and shutter inefficient plants in industries from metals
to cement. Imports from copper to crude oil are rebounding as
manufacturing data add to signs that China will meet Li’s 7.5
percent growth target this year.

“The overcapacity that everybody was so worried about is
turning out to be moot because 2013 is shaping up as a record
year for steel demand,” said Jia Liangqun, chief analyst at
Mysteel Research, the Shanghai-based company that provides data
to the National Development and Reform Commission. “To reduce
the pain as it rebalances the economy, the government has no
choice but to keep doing one of the things it does best --
investment in infrastructure, real estate and fixed assets.”

Bull Market

Rebar advanced 10 percent to 3,735 yuan on the Shanghai
Futures Exchange since reaching this year’s low on June 14 and
may extend the rally to 20 percent by the end of 2013, meeting
the common definition of a bull market. The forecasts in the
Bloomberg News survey of analysts ranged from 3,800 yuan to
4,200 yuan.

The metal remains 5.6 percent below its closing level at
the end of last year, compared with a 1.7 percent gain for the
Standard & Poor’s GSCI gauge of 24 commodities. The MSCI All-Country World Index of equities added 8.9 percent and the
Bloomberg U.S. Treasury Bond Index lost 3.8 percent.

Hebei Iron & Steel Co., China’s biggest producer, may
double profit per share this year, according to the average of
four analysts’ estimates compiled by Bloomberg. Rising rebar
prices should help most of the nation’s mills, which make almost
one in every two tons of the world’s steel.

“We’re running our mills at record rates and inventory
still hasn’t increased,” Liu Chunjian, Hebei Iron & Steel’s
deputy head of marketing in Beijing, said by phone on Aug. 28.

Credit Curbs

Growth in demand for steel may be crimped by government
efforts to tighten lending and toughen approvals for new homes
as it seeks to curb surging housing costs. New-home prices
increased for a third month in July in all but one of 70 cities
tracked by the government, rising 17 percent from a year earlier
in the southern business center of Guangzhou, the National
Bureau of Statistics said Aug. 18.

China Railway Corp., which took over the network of the
dismantled Ministry of Railways in March, is facing its highest
borrowing costs in two years, a month after Li said that new
railroads were key to stimulating the economy. The company sold
seven-year notes at 5.06 percent on Aug. 26, 49 basis points
more than a similar-maturity offer in October and the highest
for that tenor since 2011, data compiled by Bloomberg show.

Still, the government looks more likely to support
infrastructure and property investment than to curb them,
Macquarie Group Ltd. analysts led by Jiong Shao in Hong Kong
said in a report Aug. 19. Investment in infrastructure will
expand 20 percent this year, creating demand for another 135
million tons of steel, according to Jiang Yujiao, an analyst at
Citic Securities Co. in Shanghai.

Rail Stations

Concrete reinforced with rebar will be used in almost every
bridge, station and rail tie along 23,000 kilometers (14,000
miles) of track being built by the end of 2015 to meet the
government’s expansion target, according to Wu Wenzhang, head of
research at Shanghai Steelhome Information Technology Co.

Inventories of rebar held by traders in China dropped to
6.59 million tons in the week through Aug. 30, from 10.18
million tons in March, according to Shanghai Steelhome.

Steel prices have also strengthened in other regions. Rebar
in the 28-nation European Union advanced 6.5 percent to 492.50
euros ($650) a ton since the start of July, data from Metal
Bulletin show. U.S. prices for hot-rolled coil, used in
construction and cars, jumped 15 percent since the end of May,
according to Steel Index Ltd.

Global steel prices may increase 4 percent on average in
2014, following two consecutive annual drops, according to MEPS
(International) Ltd., the Sheffield, England-based industry
consultant.

Steel Shares

Shares of Hebei Iron & Steel advanced 6.6 percent since the
end of July, paring this year’s decline to 27 percent. The
Shijiazhuang, Hebei-based company will report earnings per share
of 0.018 yuan in 2013, compared with 0.01 yuan in 2012, the mean
of four analyst estimates shows.

Wuhan Iron & Steel Co., the second-largest China-listed
mill, gained 4.9 percent last month and four of the six analysts
tracked by Bloomberg recommend buying the shares. The Wuhan,
Hubei-based company will report net income of 777.5 million yuan
this year, from 210 million yuan in 2012, according to the mean
of five analyst estimates compiled by Bloomberg.

An official purchasing managers’ index for China rose to a
16-month high of 51.0 in August, the government said Sept. 1.
Readings above 50 signal expansion. The economy will grow 7.5
percent this year and 7.45 percent in 2014, according to the
median of economist estimates compiled by Bloomberg.

Iron Ore

Rates for Capesizes, the biggest iron-ore carriers, more
than quadrupled to $19,811 a day this year, according to data
from the London-based Baltic Exchange, the publisher of shipping
costs along more than 50 maritime routes. Chinese iron-ore
imports rose 17 percent to a record 73.14 million tons in July,
customs data show.

Iron ore at China’s Tianjin port, a global benchmark, rose
24 percent to $138 a ton since the end of May, according to
Steel Index Ltd. Daily crude steel output increased to an
averaged 2.15 million tons in the first seven months, from 1.95
million tons a year earlier, according to China International
Capital Corp.

“Market sentiment always swings between despair and hope
for rebar,” said Kai Ma, a Beijing-based analyst at CICC. “But
as long as property and infrastructure keep growing, demand will
hold up.”